TaxTMI 
TaxTMI 
2010 (1) TMI 942
X X X X Extracts X X X X
X X X X Extracts X X X X
....shown by assessee. 2. It is therefore prayed that above treatment given by Assessing Officer and confirmed by CIT(Appeals) may please be reversed. 3. Appellant craves leave to add, alter or delete any ground(s) either before or in the course of hearing of the appeal. (B) Revenue's appeal, ITA No.4024/Ahd/2008 for A.Y. 2005-06 [1] On the fact and circumstances of the case and in law, the learned CIT(A), Surat has erred in holding that especially from the length of holding period, gain from the sale of Units/Shares cannot be treated as "Business Income", ignoring the material fact that the borrowings of Rs. 41,02,914/- were made by the assessee, engagement of prominent Brokers, maintenance of various Bank Accounts, multiple and magnitude transactions of purchase and sale of shares/securities, holding period of shares of less than 45 days and motive behind transactions in shares, only fact emerges that the assessee is a 'trader' in dealing with the shares and units. [2] On the facts and circumstances of the case and in law, the learned CIT(A)-I, Surat has erred in treating the profit on sales of Shares/Units of Rs. 37,52,281/- a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing the year under consideration, assessee declared 'short-term capital gain' on sale of shares at Rs. 55,40,879/- and 'long-term capital gain' on sale of shares at Rs. 37,52,281/-. As per discussion made by the Assessing Officer in paragraph No.4.1, he noticed that assessee's trading in shares is at a larger scale and with for profit motive. The Assessing Officer issued show-cause notice to the assessee in response to which a detailed reply was given, but the submissions of the assessee were rejected and Assessing Officer treated entire sum of Rs. 96,76,402/- as "business income" as against capital gains declared by the assessee. The Learned CIT(Appeals), however, conquered with Assessing Officer on the basis of following reasons:- (i) The motive behind sale and purchase of shares is profit. It is evident from the fact that assessee has earned dividend of Rs. 10,55,956/-, whereas profit from the sale of shares is Rs. 96,76,402/-. Thus, the ratio of dividend to profit is 1 : 9. The motive therefore is clearly to earn profits from such transactions in a regular and systematic manner. (ii) The second reason is the frequency of transactions. The a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al gain' and not as "business income". In this regard, the Learned CIT(Appeals) has followed the Circular No.4 of 2007 of CBDT. The Learned CIT(Appeals) also made correction in respect of addition of Rs. 3,83,242/- which was found to be a totalling mistake made by the Assessing Officer and was duly corrected by the Learned CIT(Appeals). The Learned CIT(Appeals), however, held that share profits to Rs. 55,40,879/- cannot be assessed as 'short-term capital gain', but would be a "business income". 5. Before us, Learned Authorised Representative of the assessee submitted following arguments: (i) The motive behind investment in shares is not to sell the shares to earn the profit, but to hold the shares for long-term capital appreciation. The intention was to make investment to earn good returns in the form of dividends and to generate good capital appreciation over a period of time. (ii) Assessee's net investment in shares as on 31/03/2004 was Rs. 1,13,14,043/-, whereas as on 31/03/2005, it was Rs. 2,07,83,000/-. (iii) It is incorrect on the part of the Learned CIT(Appeals) to hold that ratio of dividend to profit is 1 : 9 as held by him. If....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the investment in shares have been made by the assessee out of borrowed funds. (xi) The assessee has shown the shares and securities under the head "investment" and not as stock-in-trade. This has been accepted by the Department over the years as assessment proceedings have been done under scrutiny. Further the assessee has not converted the investment into stock-intrade. The investment in shares have never been valued at market price or cost whichever is lesser but have been consistently valued at cost and declared accordingly in the return of income. Thus, it shows the intention of the assessee that it did not intend to carry on trade or adventure in the nature of trade. The fact that the holding in shares have been shown as investment and not as stock-in-trade is a relevant consideration as held by the Hon'ble Supreme Court in the case of Karam Chand Thapar and Brothers (P) Ltd vs. CIT (1971) 83 ITR 899 (SC). (xi) Assessment for last several years have been made under scrutiny assessment and assessee's income from sale and purchase of shares have been accepted as either 'short-term capital gain' or 'long-term capital gain' by the Revenue....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the time assessee is engaged in share business, therefore, it cannot be said that assessee is only making investments and not dealing in shares. The Learned Departmental Representative submitted that if we look into Explanation to section 73 of the I.T. Act, 1961, they have laid down a criteria that where income from "other sources" is less than "income from dealing in shares", then such dealing in shares will be treated as speculation. In the present case also, profit from shares is much more as compared to income from "other sources"; i.e. interest income or dividend income. He referred to the paper-book of the assessee and submitted that income from "other sources" is only Rs. 1,33,096/-, whereas profit on sale of share is Rs. 96,76,402/-. He then referred to the decision of Hon'ble Supreme Court in the case of Patnaik and Co.Ltd. vs. CIT (1986) 161 ITR 365 (SC) for the proposition that investment in Government loans and loss incurred in sale of investment would be "Revenue loss" and not "capital loss". This decision was followed by Hon'ble Allahabad High Court in the following cases also:- Sl. No.(s) Decision in the case of ... Reported in... 1. CIT vs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....supra) laid down criteria for holding as to when transaction in shares be treated as trading and when they should be treated as investment. 10. For the sake of convenience, we reproduce hereunder the relevant portion of the order of ITAT Bombay Bench in the case of Gopal Purohit vs. Jt.CIT [2009] 29 SOT 117 (MUM.). "If these facts are taken into consideration, then, following conclusions emerge: (i) The facts of the year under consideration with regard to nature of income(s) earned by the assessee and the transactions are same in all these years except transactions in FandO segment in some of the years wherein this kind of activity was started by the stock exchange. (ii) Interest on borrowed capital has been allowed as business expenditure against the profit on jobbing activities shown by the assessee as business profit. (iii) The assessee has shown shares purchased on delivery basis as investment at the end of the year and no stock-in-trade exist on that date and the assessee has earned both long-term and short-term capital gains which means the assessee has also held shares for a period of more than 12 months. 8.1 Thus, the nature of acti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re transactions, resulting into any advantage cannot be taken away by the Revenue Authorities in this manner and in these circumstances, we are of the view that, principle of consistency, though it is an exception to the principle of res judicata must be applied here. It is further so because the payment of securities transaction tax is mandatory i.e., whether an assessee earns the profit or not or suffers a loss and by imposition of such tax, the Legislature has not given any benefit to a class of transactions as a whole though it may result into an apparent benefit to individual(s) entering into those transactions. Thus, in our view, in the facts and circumstances of the case, on the basis of principle of consistency alone, the action of the Revenue Authorities is liable to be quashed. We order accordingly and direct the Assessing Officer to accept the claims of assessee in regard to short-term capital gain and long-term capital gain." 10.1. In the case of Sarnath Infrastructure (P) Ltd. vs. Asstt.CIT(supra), the Tribunal considered the Circular No.4 of CBDT(2007) dated 15/06/2007, various other decisions, such as, CIT vs. Associated Industrial Co.Ltd. (1971) 82 ITR 586 (SC), ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....res. A commercial motive is an essential ingredient of trade. (5) How the value of the items has been taken in the balance sheet ? If the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as stock-in-trade. (6) How the company (assessee) is authorized in memorandum of association/articles of association ? Whether for trade or for investment ? If authorized only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity ? and vice versa. (7) It is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of holdings. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment (or say, stock-in-trade) then onus would shift to Revenue to prove that apparent is not real. (8) The mere fact of credit of sale proceeds of shares (or for th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent. The assessee has enjoyed dividend income and declared the same in the return of income trading the transactions as investment, even if frequency of selling of shares may be more but in respect of shares held for a considerable longer period (for more than 366 days) as per finding given by the Learned CIT(Appeals). This finding remained uncontroverted. The assessee has earned gain of Rs. 37,52,281/-, on sale of those shares which were held for more than 366 days and upto 6832 days. In any case, when those shares were purchased it could not be said that intention of the assessee was to deal in them and not to hold them as investment. Even in the case of investment it is for the assessee to decide when to dispose them off so that to give maximum return out of them. There is no theory that asset held on long-term basis should be sold only at the time of need or in emergency. He can very well sale the investments to reap the benefit when prices of shares are high so as to earn better gains and make investment elsewhere. In our considered view, it is the decision of the assessee to dispose of an investment, if according to him, market value thereof have reached a plateau so as to ma....
X X X X Extracts X X X X
X X X X Extracts X X X X
....are high frequencies and low holdings in many transactions of shares indicating that assessee has some intention of purchasing and selling shares as a trader. The case of the assessee is supported by the fact that it has entered the purchases in the books as investment, shares are valued at cost and Revenue is holding such accounting treatment as investment in the past. Thus, there cannot be a fixed criteria to decide as in the present case whether assessee has traded in shares eventhough assessee held them as investment. 18. Though it has been held in the case of Sarnath Infrastructure (P) Ltd.(supra) that delivery of shares is an important criteria for holding that assessee is investing in them but after dematization where shares are delivered in the DEMAT account the next day, it cannot be held that in all such cases, it would be investment and not trading. If that is so held, then all those traders in shares in whose DEMAT accounts shares are delivered can be said to have earned capital gains and not profits. Therefore, only one criteria, i.e. Delivery of shares alone will not be sufficient to decide the issue. Even otherwise in Sarnath Infrastructure (P) Ltd.(supra) itself ....